Small business retirement exemption

You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. If you're an individual who chooses the retirement exemption, you don't need to terminate any activity or cease business. This concession allows you to provide for your retirement. If you're a CGT concession stakeholder and receive payments under the retirement exemption, you're not required to terminate your employment.

Interaction with other concessions

You may choose to apply the small business retirement exemption (if you're not eligible for the 15-year exemption):

after the small business 50% active asset reduction, that is, to the remaining 50% (or if the CGT discount has also applied, the remaining 25%) of the capital gain after capital losses have been applied

instead of the small business 50% active asset reduction, that is, to the capital gain that remains after you have applied any CGT discount and capital losses (this choice might allow a company or trust to make larger tax-free payments under the small business retirement exemption)

where there has been a change in status of a CGT asset that was a replacement or capital improved asset in a rollover under subdivision 152-E (CGT event J2) where a change happens in circumstances where a share in a company or an interest in a trust was a replacement asset in a rollover under subdivision 152-E (CGT event J2)

where you chose the rollover under subdivision 152-E and by the end of the relevant period you had not acquired a replacement asset, or made any capital improvements (CGT event J5), or

where you chose the rollover under subdivision 152-E and by the end of the relevant period the amount you incurred on a replacement asset was less than the amount chosen for the rollover (CGT event J6).

Unless the capital gain arises from CGT event J5 or J6, you may choose the small business rollover instead of the retirement exemption (if the conditions are satisfied) or you may choose both concessions for different parts of the remaining capital gain.

Conditions you must meet

Individual

you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

if you're under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying super fund or retirement savings account (RSA).

You must make the contribution:

when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or

when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6.

If you choose the retirement exemption after you've received the capital proceeds (for example, when you lodge your income tax return), you're not required to make the contribution until you make the choice. Accordingly, you may use the capital proceeds for other purposes before making the choice. However, once you make the choice, you must immediately make a contribution of an amount equal to the exempt amount if you were less than 55 years old just before you made the choice.

To satisfy this requirement, you must pay the amount into a complying super fund or RSA by the relevant date. This is an important requirement. Failure to immediately contribute the amount will mean the conditions are not satisfied, and the retirement exemption will not be available.

If you're 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying super fund or RSA, even though you may have been under 55 years old when you received the capital proceeds.

If the gain arises as a result of CGT events J5 or J6 (about the replacement asset conditions not being met for the small business rollover concession) you can choose the retirement exemption for those gains without having to satisfy the basic conditions again. This is because you would have already satisfied the basic conditions at the time you chose the rollover.

If you receive the capital proceeds in instalments, the above requirements about making a contribution apply to each instalment (up to the asset’s CGT exempt amount). If your capital proceeds from the disposal of a CGT asset are increased by one or more financial benefits that you receive under a look-through earnout right relating to that CGT disposal, you are treated as receiving those capital proceeds in instalments.

Death and the retirement exemption

You may be eligible for the retirement exemption if you make a capital gain on an asset within two years of a person's death, if that asset is or was part of that individual's estate, and you're a:

beneficiary of the deceased estate

legal personal representative (executor), or

trustee or beneficiary of the testamentary trust (trust created by a will).

You may also be eligible if you, together with the deceased, owned the asset as joint tenants.

You'll be eligible for the retirement exemption to the same extent that the deceased would have been just prior to their death, except that there is no requirement for the deceased to contribute an amount to a complying super fund or RSA.

you keep a written record of the amount you choose to disregard (the exempt amount) and, if there is more than one CGT concession stakeholder, each stakeholder’s percentage of the exempt amount (one may be nil, but together they must add up to 100%)

you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual’s percentage of the exempt amount

the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and

where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset’s CGT exempt amount). If your capital proceeds from the disposal of a CGT asset are increased by one or more financial benefits that you receive under a look-through earnout right relating to that CGT disposal, you are treated as receiving those capital proceeds in instalments.

You must make payments:

if you choose the retirement exemption for a J2, J5 or J6 event, seven days after you choose to disregard the capital gain

in any other case, by the later of

seven days after you choose to disregard the capital gain

seven days after you receive the capital proceeds from the CGT event.

If a CGT concession stakeholder is under 55 years old just before a payment is made in relation to them, the company or trust must make the payment to the CGT concession stakeholder by contributing it to a complying super fund or RSA on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

There is no requirement to make this contribution if the stakeholder was 55 years old or older.

Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your tax return), there is no requirement to make any payment until you have made the choice. Accordingly, you may use the capital proceeds for other purposes before choosing. However, once you choose, you must make the payment by the end of seven days after making the choice.

This is an important requirement. Failure to make a payment by the end of seven days after making the choice to a CGT concession stakeholder (if they are 55 years old or older) or into a complying super fund or RSA (if the stakeholder is under 55 years old) will mean the conditions are not satisfied and the retirement exemption will not be available.

If the gain arises as a result of CGT events J5 or J6 (when the replacement asset conditions have not been met for the small business rollover concession) you can choose the retirement exemption for those gains without having to satisfy the basic conditions again. This is because you would have already satisfied the basic conditions at the time you chose the rollover.

The requirement for companies and trusts to make a payment to at least one CGT concession stakeholder can be satisfied by making the payment directly, or indirectly, through one or more interposed entities to a CGT concession stakeholder. There are no tax consequences for the interposed entity that receives and passes on the payments.

Example: small business retirement exemption

After offsetting her capital losses and applying the CGT discount and the small business 50% active asset reduction, Lana has a capital gain of $3,500.

Lana could choose the small business retirement exemption but, as she is younger than 55 years old, she would need to pay the amount into a complying super fund or RSA.

Lana decides she needs the funds to reinvest in the business and so does not choose the retirement exemption.

End of example

Termination of employment not required

Where payments are made by a company or trust to a CGT concession stakeholder, the stakeholder is not required to cease any activity or office holding.

For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business.

Deemed dividends

Payments made to a CGT concession stakeholder who is an employee, to satisfy the retirement exemption requirements, are not deemed to be in consequence of termination of employment for the purposes of section 109 of the ITAA 1936 (about excessive payments to shareholders, directors and associates being deemed to be dividends).

Division 7A of the ITAA 1936 also does not apply to treat such payments made by a company or trust as dividends.

Payments made to satisfy the retirement exemption requirements are not treated as a dividend or frankable distribution provided you are:

Capital proceeds received in instalments

If a company or trust receives the capital proceeds from a CGT event in instalments and chooses the retirement exemption, it must make a payment to at least one of its CGT concession stakeholders on receipt of each instalment, up to the CGT exempt amount. The payment must be made by the later of seven days after the choice is made or seven days after an instalment of the capital proceeds is received.

In this situation, the total amount of each instalment must be paid until the total of the payments equals the capital gain being disregarded. In other words, the requirement to make a payment must be satisfied to the greatest extent possible out of the initial instalments, rather than in some other way, such as an apportionment across all the instalments received.

If an individual receives capital proceeds in instalments, each instalment is treated as a separate payment. This means that each instalment is looked at separately and in succession in applying the exemption up to the individual’s CGT exempt amount.

Receiving actual capital proceeds not required

It is not essential to receive actual capital proceeds from the CGT event to be able to choose the retirement exemption. The retirement exemption is available where a capital gain is made when an active asset is gifted and the market value substitution rule has applied, or where CGT event J2, J5 or J6 happens.

Example: Capital proceeds not received

In December 2006, Harry retired from farming and transferred the farm, which he acquired in 1996, to his son for no consideration. The market value of the farm was $1 million, so the market value substitution rule applies to deem the capital proceeds to equal the market value of the farm. As the cost base of the farm was $600,000, Harry made a capital gain of $400,000.

Harry reduced his capital gain by the 50% CGT discount to $200,000 and then further, by the 50% active asset reduction, to $100,000. Even though he has not received any capital proceeds, Harry may choose the retirement exemption for the full amount of the remaining $100,000 capital gain (assuming the other retirement exemption conditions are satisfied).

End of example

To access the exemption on a gain made by a company or trust for which there are no actual proceeds, the company or trust must make a payment of the disregarded capital gain to at least one of its CGT concession stakeholders.

CGT retirement exemption limit

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your ‘CGT retirement exemption limit’ or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions. For a company or trust with eight CGT concession stakeholders (four significant individuals and their four spouses, where each spouse has a small business participation percentage greater than zero) the limit is effectively $4 million, that is, $500,000 for each stakeholder.

A company or trust may determine the percentage of the exempt amount attributable to each stakeholder, having regard to each stakeholder’s retirement exemption limit (or remaining limit).

Example: Retirement exemption limit

Daryl and his wife, Mary, each own 50% of the shares in a company and are both significant individuals of the company. The company makes a capital gain and specifies Daryl’s percentage of the exempt amount to be 90%, which means that the percentage specified for Mary must be 10%. Daryl’s retirement exemption limit is $500,000.

To determine whether his exemption limit is exceeded, Daryl would take 90% of the exempt amount, add that to amounts previously specified, and see whether the total exceeds $500,000.

End of example

Consequences of choosing the exemption

If you choose this exemption, you disregard the amount of the capital gain you have chosen as the CGT exempt amount.

The amount of any capital gain that exceeds the CGT exempt amount does not qualify for this exemption.

Payments made to CGT concession stakeholder

If you're a CGT concession stakeholder, a payment you receive from a company or trust to satisfy the retirement exemption requirements is not assessable income and is not exempt income.

If you're a company or trust making the payment, it is not able to be deducted from your assessable income.

Interposed entities receiving or making payments

If you're a company or trust receiving a payment (whether directly or indirectly through one or more interposed entities) that another company or trust made to satisfy the retirement exemption requirements, and you're passing that payment on to a CGT concession stakeholder or another interposed entity:

the payment you receive is not included in your assessable income and is not exempt income, and

the payment you make is not deductible from your assessable income.

Amounts that are not assessable income and not exempt income have no implications for tax losses of previous years.

A payment you make to satisfy the retirement exemption requirements is not treated as a dividend nor a frankable distribution provided:

you are an interposed entity receiving a payment and passing that payment on, or

you are a company making a payment to

a CGT concession stakeholder, or

an interposed entity.

This is the case despite section 109 of the ITAA 1936, which can treat excessive payments to shareholders, directors and associates as dividends. Therefore, section 109 has no application to these payments.

Division 7A of the ITAA 1936 also does not apply to treat such payments made by a company or trust as dividends.

Superannuation consequences

From 1 July 2007, if you're contributing a retirement exemption amount to a super fund or RSA, the amount is generally a non-concessional contribution. To exclude the amount from your non-concessional contributions cap and have it count towards your CGT cap amount instead ($1,415,000 for 2016–17), you must notify the fund using the Capital gains tax cap election. You must complete this form by no later than the time you make the contribution.

Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you're under 55, the exempt amount must be paid into a complying super fund or a retirement savings account.

Our commitment to you

We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations.

If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure how it applies to you, contact us or seek professional advice.